23 December 2008

The root of the problem

  • Dec 23, 2008

The root of the problem

For a long time now we have tried to believe in supply side economics (also known as Reganomics, closely related to the trickle-down theory).
Cut taxes and/or interest rates, which means people will have more money or borrow more (respectively), which they will in turn spend, and that spending will make the economy grow. Bush Jr. gave tax-payers not just a break, but a refund, calling it a "stimulus". This apparently did not work, because only a few years later we were at the point of handing billions of tax money over to major corporations.

The very idea that stimulating consumption can help the economy is flawed.

The goal is to increase the total amount of value circulating in the economy.
We want constant growth.
Setting aside for the moment the logical, ecological, and spiritual problems with never-ending growth, it is fairly straight-forward that consumption alone does not create anything.

Imagine several ship-wrecked survivors on a tiny deserted island. They have the luggage they brought with them, but nothing else.
Imagine they find some rare, beautiful shells, and decide to work out a system of representative currency using these shells.
It doesn't matter how much these shells are traded, saved, or spent. There is still the same amount of total value on the island.
No amount of consumption is going to increase the overall material holdings of the survivors. The only way any one person can amass anything more than they started with is at the expense of someone else.

As manufacturing has moved over seas, and produce is increasingly imported, we have moved to a service and finance based economy.
Nothing new is created by a service.
The finance industry is literally nothing more than moving virtual money - a placeholder for actual wealth - around, and skimming a transaction fee off the top.
Imagine one of our survivors loaning the worthless shells to another survivor, with a one shell per 100 interest rate, though there is nothing of any real value to buy.
Both the borrower and the investor still have no food, no clean water, and no shelter.

Perhaps one day someone comes across an enormous pile of shells, and places them into circulation.
You could say the total worth of our survivors has just increased - but obviously it doesn't mean anything. In fact, now that they aren't rare, each shell is worth that much less.

This is EXACTLY what happens every year, when the government literally prints up new money which is not tied to any actual increase in production.
They just print new money.
In fact, taxes pay for 59% of government spending. The other 41% comes from borrowing money (not much different from an American consumer with a credit card) and.... scooping more shells of the beach, and pretending that they have any value.
Since everyone agrees that $1 is worth some amount of real stuff, they can get away with this, but since they are spending without creating anything real, that value has to come from somewhere.
Where it comes from is out of every dollar held by every person in the country, as they become less valuable due to the increased supply. In a way, printing money to cover the deficit is a backdoor tax, a tax via inflation, but one which doesn't build us any new roads or guarantee healthcare.

When you think of the island, it is easy to see that this system isn't really doing any good overall.

In the scale and complexity of the real world, it can seem like something more is happening.
We gauge the economies success by the stock market - but the stock market is just trading money around. The stock market doesn't actually produce anything. Stock can go up in a company because the company has built something amazing and new - or it can go up because a lot of people think it will come up with something new. When someone starts shouting "soy" everyone thinks maybe they know something, and everyone buys soy. The mere fact of people buying drives the price up, even if nothing has changed in the real world.
When they speak of "investor confidence" this is exactly the phenomenon they are talking about.

So what does actually create real value?

The most basic ones are those which make raw materials available to us, mining, logging, and agriculture.
Then, the processes which turn those raw materials into more complex and useful things, the processes of technology. Manufacturing, construction, trade-crafts. These things cause something useful to exist which did not exist previously.

America was built on these very industries. Today they make up an increasingly small portion of the economy, overshadowed by finance (over 1/4!) trade and consumption.
It should go without saying that consumption does not create wealth. Production does. By definition.
As government regulation and import taxation decreased, industry increasingly moved overseas where they could find cheap labor. The cost of our cheap Asian and South American produced clothes and food is not only lost American jobs, but a loss of the creation of real wealth. It looks like the economy is growing as a few people get much richer, but if the entirety of GDP growth goes to the top 1% of the population...

(median income has actually dropped over the past 7 years, while total GDP has risen 19.9%. Currently the richest 1% of the population holds as much wealth as the entire lower 90% combined)

...then it doesn't do anyone else any good.

This is all an inevitable result of an increasingly free market. A deregulated market has lead to outsourcing labor and the obscene, unprecedented wealth we are seeing concentrated in the hands of just a few individuals; weakening unions (and accompanying loss of benefits and job security) and a massive trade deficit, not to mention untold environmental degradation.

It seems that at least that top 1% was genuinely benefited (albeit at our expense), but the very system is unsustainable at its very root.
We keep shuffling the same few items in the luggage that washed ashore around, but no one is doing any real work.
Eventually our creditors are gonna start calling in the debts (well, with 50% of the worlds military budget, no one would dare, but they will stop offering new credit)

We are not in an economic crises.
We have never seen an economic crises.
The Great Depression was not an economic crises.
Not like the one we are setting ourselves up for.

I believe it is not inevitable. It can be diverted. But the one chance we have is to drastically change our priorities - no, our entire outlook, define the ultimate goals in terms of the effect on average people, and be willing to challenge the wealthy who have bought a lot of power.
And we have to do it soon.

[NOTE: Consumption, while not creating wealth, does "create" jobs, in a sense, if and only if what is being consumed is American made goods - more here: "A Poor Person Never Gave Me a Job" http://biodieselhauling.blogspot.com/2012/06/poor-person-never-gave-me-job.html]

No comments:

Post a Comment

If you ask a question, I will answer it.

NEW: Blogger finally put in a system to be notified of responses to your comments! Just check the box to the right, below, before you hit "publish"